A corporation's balance sheet contains three main parts: assets, liabilities and stockholders' equity. Within the stockholders' equity part exists two sections, or types, of company equity. The first represents the company's retained earnings, while the second represents the company's stock transaction activity. These types of equity differ in how and why the company receives them and what they represent.
Corporations accumulate earnings on the balance sheet, beginning at the company's inception, and call them retained earnings. Companies also track dividend payments cumulatively starting at inception, and net them against retained earnings. Retained earnings represents all of the money kept by the company, rather than being paid out to its stockholders. An accountant records retained earnings on a separate line in the stockholders' equity section of the balance sheet.
Retained Earnings Characteristics
Young companies or those in financial distress may show negative retained earnings. Accountants may record these as accumulated losses, retained losses or an accumulated deficit. Although current period retained earnings may be negative, the company could show a positive retained earnings figure on the balance sheet due to the previous periods of positive net income, or retained earnings. Companies must adhere to certain guidelines for retained earnings. For example, the IRS mandates limits on the amount of earnings companies can retain rather than paying them out as dividends to stockholders. In the rare event a company retains too much of its earnings as determined by the IRS, the IRS assesses a 15 percent penalty in the form of an accumulated earnings tax.
Paid-in capital represents all the equity held in a company by its stockholders. This includes common and preferred stock and any donated capital. If a company repurchases some of its shares, an accountant records the repurchases as "treasury stock" in a separate account within the paid-in capital section of the balance sheet.
Additions to Paid-In Capital
When a company records new stock and sells the shares, an accountant records the sale into two different accounts. For example, a company issues common stock with a par value per share of one cent, one dollar or another inconsequential amount. This portion of the stock's value, the par value multiplied by the number of issued shares, gets recorded in the common stock account. Assume the company issues the stock for $5 per share. The number of shares multiplied by the issue price minus the par value is recorded in a "paid in excess of par" account in the paid-in capital section. Stocks issued at no par do not require this step -- the accountant records the full value in the common stock account.